Fees & Performance

Within this section we will aim to provide an overview of the different charging structures between some of the country’s leading Independent Financial Advisers and how these charges can mount up, the hidden charges that clients may not be aware of and how it is possible to reduce costs.

“If you really knew who was making money out of your Investments which company would you choose”

“Investing with Company A would cost you £25,000 Initial Fee for an Investment of £500,000 compared to Company B which could cost £5,000; this is a saving of £20,000 on the initial fee alone. Because we feel so strongly your investment should be working for you and not your adviser, we will only refer to companies who can provide the highest level of service and performance, with a fee structure that operates within the level of Company B.” (For more detail of this service and what you could be saving please read below)

Research by the leading financial think tanks has revealed the divergence in pricing between some of the country’s leading financial advising firms and investment firms which depending on the level of fee you are charged could cost you almost 40% of your portfolio’s value over a twenty year period. This together with the level of performance over this time, could significantly impact your quality of living in your later years especially if the capital value of your pension is eaten into because of excessively high fees.

To see the effects these higher fees can have on investments and pensions, we have calculated the difference that this could make to your investments over a 20 year period comparing the highest fees against the lowest fees charged on average.

Taking the example of a £500,000 portfolio, we have applied the charges for each of the providers detailed below over a 20 year investment period. We assumed an annual return at an average rate of 5% (although of course this isn’t guaranteed) and no further contributions. The charges shown include all underlying charges; Initial Fee, Platform Fee, Fund Manager Fee, Discretionary Fund Manager (DFM) fee, Transaction Costs and Stamp Duty.

What we found is that a portfolio of £500,000 which is invested with one of the most expensive providers who charges in total an initial fee of 5% when you include all of the fees incurred such as the IFA’s Initial Fee of 3%, the Platform Fee of 0.5% and the Fund Manager Fee of around 1.5%. With an Ongoing fee of 2.5% which includes the IFA Ongoing Fee of 0.50 to1%, the Platform Fee of 0.5% and the Fund Manager Fees of 1.5%.

The investment could have increased to £795,671 after the 20 years (before tax).
However, if you had invested the same sum with the provider who charges the least the portfolio could potentially be worth £1,278,462.

“In other words, you could have lost out on £482,791 because of high fees and the effects of compounding”.

It would take a further four years of growth at 5% per annum to restore the initial fee cost of 5%, when taking into account the effects of the 2.5% ongoing fee, before your investment started to grow beyond your initial investment. Whereas it would take two years depending on performance to restore the initial fee cost of 2%.

“As a referral company we are very conscious of how fees can affect the performance of your investments. This is why we will only refer to companies who can provide the highest level of service and performance to individuals, with a fee structure that will benefit your overall Investment Strategy and Objectives”

The Different Types of Financial Advisers; How Fees are Charged and Where to Look
We have combined this research together with a survey of a number of Independent Financial Advisers and Investment Firms nationwide to provide an overview for individuals of how fees are charged in the process of making an investment. This is to enable individuals to better understand the investment jargon used and where fees can be over looked when establishing the true cost of making their Investment.

We will look at the impact of fees such as an Independent Financial Advisor’s (IFA) Initial Fee, Platform Fee, Fund Manager Fee, Investment Management Fees (DFM), Transaction Costs and Ongoing Fees. This will then be analysed against the expected return which is assumed at 5% to understand how these costs can affect the expected level of the performance to see how much your investment and pension is expected to have grown over the given time period of twenty years and the impact fees can have on this growth.

The research is based on an investment portfolio of both £150,000 and also a larger investment of £500,000.

Company A

Independent Financial Adviser: Investing using a Platform to purchase Unit Trust and Open Ended Investment Companies OEIC which is managed by a Fund Manager.

There are many ways to invest your money each have their benefits and merits. You can use the services of an Independent Financial Adviser who will provide a whole of market approach to your financial needs. Some will invest directly themselves using a “platform” which will provide the IFA the excess to the markets to enable to them to purchase the Unit Trust and Open Investment Companies (OEIC) on your behalf. The Platform will charge a separate fee to act as a wrapper to hold the fund on your behalf every year, this fee is usually between 0.5% to 1%. The Fund Manager who actually manages your individual fund which is a fund which holds a basket of around 30 individual bond/equity shares, will then charge a separate fee to manage this for you of between 1% to 2% per fund, so generally the more funds you have often the higher the charge incurred, depending on rebates.

On top of these charges the Independent Financial Advisor (IFA) will charge an Initial Fee which varies depending on the individual company, anything from 1% through to 6% (for our calculation we have taken the average of 3% initial).

This represents the Whole Initial Charge for investing £150,000 equating to 5% when you include the IFA Initial Charge of 3% which in monetary terms is £4,500 the platform fee of (0.5%) which in monetary terms is £750 and the fund manager fees (1.5%) which in monetary terms is £2,250. Combined the Total Initial Investment Fee of (5%) in monetary terms £7,500 is taken from the investment during the course of the first year in fees.

With an investment of £500,000 the Whole Initial Charge including the IFA Initial Charge of 3% which in monetary terms is £15,000, the Platform fee of (0.5%) which in monetary terms is £2,500 and the Fund Manager fee of (1.5%) which in monetary terms is £7,500. Combined the Total Initial Investment Fee of (5%) in monetary terms £25,000 is taken from the investment during the course of the first year in fees.

Compensation Scheme – Independent Financial Advisors investing using a platform and Fund Managers who invest in UK regulated Investments are covered by the FSCS Compensation Scheme up to the level of £75,000. The individual funds are usually protected between the level of £50,000 to £75,000 depending on the individual fund manager.

Independent Financial Advisor’s: Using Professional Investment Firms (DFM) to manage their Clients Investment.

There are Independent Financial Advisor’s who are not linked to any Professional Investment Firms such as Discretionary Fund Management (DFMs) firms, but refer clients to these firms. These Independent Financial Advisors (IFAs) use the expertise of the Discretionary Fund Manager to manage their client’s accounts. The DFM will purchase and manage the full scope of the stock market from individual Shares, Bonds, Investment Trust, ETFs, Unit Trust and OEIC, they are effectively your own individual fund manager.

There is an initial charge paid to the financial advisor which can be between 1% to 6%, again we will take an average of 3% (£4,500), and there is the fee paid to the DFM for investing the investment which is usually on a percentage of 1.12% for the first £20,000 and 0.5% thereafter which for £150,000 would equate to £874 in purchase transaction costs, plus 0.85% management costs which will be taken during the year as an ongoing charge of £1,275. There would also be a percentage of the investment that would be invested in to OEIC which would also incur a fund manager charge of around £150, and stamp duty may also be liable £375. The Whole Initial Fee would equate to £7,174 which is an “Initial Charge of 4.7% including all costs.

With an investment of £500,000 the Whole Initial Charge including the DFM fee of (1.12%) and transaction cost £640 and stamp duty £1,750, equates to a 4.7% Initial Charge which is monetary terms is a fee of £23,500 in total taken from the investment during the course of the first year in fees.

Compensation Scheme – Independent Financial Advisers often use the service of discretionary fund managers to invest their client’s investments and pensions as it also provides an additional level of protection for their client’s. This is because most discretionary fund managers provide their own custody to run the client’s money, so they will usually protect the client’s individual nominee account to the amount of 1 Million to 2 Million Pounds. This means if the company should have any issues the clients investments below this level is protected, along with the usual £75,000 protection provided the FSCS scheme.

Company B (Companies we will Refer)

Investment Management Firms Direct: Who offer Independent Financial Advise as part of their service.

These are Investment Management companies who aim to provide the complete service of Investment Advice and Independent Financial Advice to their clients. These companies work with Independent Financial Advisers to provide a tailored service for their clients on all aspects of financial planning and investment management. Through the flexibility of their charging structure they look to provide separate the charges for both the financial advice and investment advice, so the client is only charged for the advice that is provided. This prevents the client paying two fees (the IFA and Investment Manager) for the investment advice when really only one fee is required. As investing your money is often the most expensive part of financial advice, this is often where the fees can start to build up if you are paying both the IFA and the Investment Manager a fee for the same work.

The Investment Management firms recognise this for their clients and if additional Independent Financial Advice is required for certain aspects where appropriate they will seek this, this way keeping the cost for the client to the minimum.

These are often national companies with local offices with significant financial backing. They look to provide their clients with the complete service of investment knowledge, research, customer service and performance.

For Investment and Pension advice the complete advice fee including Independent Financial Advice fee including Investment Advice Fee varies between 1% to 3%, but no additional fees are charged for the initial fee. For an Investment of £150,000 there will be a transaction cost of around £874, OEIC fees of £150, Stamp duty of £360. The ongoing charges are charged at 0.85% with an extra £100 for transaction fees and stamp duty if changes are required including all transaction and investment costs. The Total Whole Initial Fee 2.98%

For an investment of £150,000 this equates to an Initial Fee of 2.98% which in monetary terms is around £4,484 with an ongoing fee of 0.90% which in monetary terms is £1,384

For an investment of £500,000 the fees are tapered down the larger the investment made, this equates to an initial fee of 1.8% which in monetary terms equates to £9,410 with an ongoing fee of 0.90% which in monetary terms is £4,500

Compensation Scheme –Discretionary fund managers provide their own custody to run the client’s money, so they will usually protect the clients individual nominee account to the amount of 1 Million to 2 Million Pounds. This means if the company should have any issues the client’s investments below this level is protected, along with the usual £75,000 protection provided the FSCS compensation scheme.

One of the cheapest and most flexible ways to invest with an Investment Manager.

If you are looking solely for Investment and Pension Advice, without the requirement of advice from an Individual Independent Financial Adviser, for example you have decided you wish to invest £150,000. An Investment Manager can invest your portfolio for you using your tax allowances such as your ISA allowances and your additional tax breaks within your Pension where appropriate.

You can go direct to these firms for this advice. Depending on the company they will charge between 1% to 1.4% to invest your money and then a further management fee of between 0.85% to 1% to manage you investments. Investing directly with Investment Management firms may not be appropriate in all circumstances. We would be happy to discuss your situation with you and provide you with the necessary the information.

For the Investment of £150,000 this would equate to around £949 in transaction costs, OEIC fee of £225, £500 of stamp duty. The total Investment Fee 1.12% which in monetary terms is £1,680. The ongoing fee for investing with an investment management firm directly is around 1% to 0.85% on average a fee of £1,275 with additional transaction costs of around £150 including stamp duty.

An investment of £500,000 would equate to around £1,224 in transaction costs, OEIC fee of £350, Stamp duty of £1,500. The total Investment Fee 1% which in monetary terms is £5,000. The ongoing fee for investing with an investment management firm directly is around 1% to 0.85% on average £4,250 with additional transaction costs of around £300 including stamp duty.
All Fees provided are examples taken from research and surveyed companies nationwide. We have used the average fees for these calculations. More Information on charges can be found on the “WHICH” website.

Some firms will also charge VAT on their own Fee at 20% for example for Company B The Total Investment Fee of £5,000 would be £6,000 if VAT was included. VAT is charged on the total fee figure. Most firms do not charge VAT.

Compensation Scheme –Discretionary fund managers provide their own custody to run the client’s money, so they will usually protect the clients individual nominee account to the amount of 1 Million to 2 Million Pounds. This means if the company should have any issues the client’s investments below this level is protected, along with the usual £75,000 protection provided the FSCS compensation scheme.

FIND A LOCAL ADVISER

Our network of companies and advisors we refer to are carefully selected on the quality of their service, their performance, and their fee structure